Why do REIT’s have high payout ratios? Investors looking to invest in real estate investment trusts (REITs) may be intimidated by payout ratios of more than 100%, 200%, or even 300%. Do not fret, since REITs are unique entities and an even better financial metric, Net Funds from Operations, can be used to assess their performance than payout ratios. A REIT is a company that owns, operates, or finances real estate that produces income that mostly goes to its shareholders.
REITs are required by law to distribute more than 90% of their earnings in the form of dividends, meaning all REITs should have a payout ratio of more than 90%. Some REITs, however, will distribute even greater portions of their earnings in which payout ratios climb to well over 100%. Huge payout ratios sound nice, but this could mean a company is unlikely to increase its dividend and may be headed for an inevitable dividend cut. It also may indicate the company is taking on additional debt to pay its shareholders — an unsustainable practice at best. But for REITs, the story is different.
Source: Dividend Investor
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